1. Strive for the Lowest Possible Drawdown (Aim for 0 Drawdown)
Drawdown is a key metric to evaluate the performance of a strategy, representing the loss from a peak to a trough in the asset value. Zero drawdown is an ideal that is practically impossible, but you can minimize drawdown by optimizing your strategy. For example:
- Use stop-loss and take-profit strategies to control the risk of each trade.
- Choose appropriate technical indicators to help assess market trends, such as Bollinger Bands, RSI, etc., to avoid entering unfavorable market conditions.
- Adjust position sizes dynamically based on market conditions, avoiding excessive leverage.
The key to reducing drawdown is to maintain steady profits while minimizing the loss of each trade. The ideal strategy is one that grows gradually over time, avoiding large floating losses.
2. Improve the Profit Factor, Target at Least Greater Than 10
The Profit Factor measures the ratio of total profits to total losses. It is calculated as:
$ \text{Profit Factor} = \frac{\text{Total Profit}}{\text{Total Losses}} $
To optimize the Profit Factor, consider the following:
- Choose efficient entry and exit conditions: Ensure each trade has a high probability of success. For example, use multiple indicators (like RSI and MACD) to confirm the market direction and avoid entering a ranging market.
- Refine stop-loss and take-profit strategies: Set appropriate stop-loss and take-profit levels for each trade to prevent large losses and lock in profits.
- Diversify trading signals: Select different signals for various market environments to avoid overtrading during volatile conditions.
Achieving a Profit Factor greater than 10 typically requires long periods of backtesting and optimization, with careful attention to results in different market environments.
3. No Need to Pursue Too High a Trading Frequency
Many traders overemphasize high-frequency trading, thinking that more trades mean more profit. However, frequent trading can lead to:
- High transaction costs: Fees and slippage can significantly reduce profits.
- Overtrading can lead to losses: Frequently opening positions in unfavorable market conditions can cause losses.
Therefore, the focus when optimizing your strategy should be on low-frequency trading. For example, executing just one trade per day can be sufficient. Reducing excessive trading frequency, especially in volatile markets, helps avoid unnecessary losses.
4. Low Daily Profit, But Very Stable
A robust strategy typically generates low daily returns but with high stability. While the daily returns may be small, the advantage lies in steady growth over time. Here are a few points to help optimize such a strategy:
- Steady growth: Keep the daily returns at a relatively low but stable level, instead of chasing short-term large profits. This strategy avoids the risks associated with high volatility.
- Capital management: Allocate funds wisely and adjust the capital size according to market conditions, avoiding putting too much capital in any single trade.
- Long-term perspective: By accumulating small, steady profits over time, the overall capital growth will become significant. The power of compounding becomes apparent in the long run.
Stable, low-frequency returns tend to lead to higher profits over time through compounding, whereas short-term high-frequency trading often comes with greater risks and higher volatility.
Conclusion
The key to optimizing a Freqtrade strategy is:
- Minimizing drawdown while maintaining a stable profit curve.
- Increasing the profit factor to ensure high success rates for each trade.
- Avoiding high-frequency trading and focusing on fewer, higher-quality trades.
- Maintaining steady daily profits and leveraging compounding for long-term growth.